More potential conflicts found in retirement system audit

Published: May 12, 2006

Ed Theobald, the former chairman of the $5 billion New Hampshire Retirement System board, regularly dined and entertained on behalf of his private clients with consultants from Evaluation Associates Inc., according to his sworn testimony included in an extensive independent audit released by the retirement system at the end of April.
EAI is a Connecticut firm that served as gatekeeper for fund managers seeking to handle millions of dollars in pension funds overseen by the board that Theobald presided over.
The 68-page audit - conducted by the Boston law firm of Bingham McCutchen — itself barely mentions that particular potential conflict of interest, but it does fault Theobald for not fully disclosing numerous other conflicts first reported last year in New Hampshire Business Review and other publications.
“It is simply poppycock to suggest that Ed misused his position,” said Theobald’s attorney Lucy Karl. “These types of contacts happen every day in the industry. A contact does not make a conflict.”
The audit’s findings included:
• Theobald’s Boston firm, Maiden Lane Associates, accepted free rent, meals and entertainment from American Express/Northwinds Trade Association while the Retirement System was investing in the company. Indeed, Theobald presided over the Retirement System’s decision to invest $10 million in another fund pitched by his officemate without disclosing the rent arrangement.
• Theobald failed to fully disclose that he was offered a board seat and an ownership percentage of Hermes Technology, while voting to continue to consider investing in the firm, despite the board’s longstanding avoidance of investing in a single company. (He didn’t accept the offer, and the board never made the investment.)
• Theobald did not properly disclose Maiden Lane’s $500,000 investment in two Prism funds that the board also invested in. It was Prism that - with Theobald’s support - evaluated the Hermes proposal.
• Despite agreeing to recuse himself, he presided over board discussions over Pine Street Associates, another firm with which Maiden Lane was doing business.
• Theobald repeatedly solicited two brokers for the Retirement System - Great Lakes Associates and Pension Evaluation — on behalf of his private clients. At the same time, he pushed the Retirement System board to rely on the brokers more. He also allegedly asked a vendor to use Great Lakes, despite agreeing not to do that.
• He wrote to Retirement System vendors on Retirement System stationery asking for donations to a firefighters’ charity, complete with handwritten notes and the amount to be donated circled. Many of the vendors subsequently donated to the charity, which the audit said could be interpreted as a “pay-to-play” effort.
• Theobald invested in Sterling Venture Partners, in which the Retirement System invested $20 million in 2000. Maiden Lane withdrew its investment in Sterling shortly before the board agreed to invest another $25 million in a Sterling fund in March 2005.
Gov. John Lynch and the Executive Council replaced Theobald - who presided over the board beginning in 1998 - last Oct. 6, amid controversy over various conflict-of-interest allegations. The attorney general also has launched an investigation of the Retirement System that is still “open and active” but would not disclose any details.
Theobald has maintained that he did disclose any conflicts sufficiently, and if anyone wanted more information they could have asked.
“Due to the small world of the public sector, it should not be surprising that those who work in the sector rub shoulders at conferences and meetings and that word-of-mouth recommendations are a mainstay of the process,” wrote Theobald’s attorney, Steven Gordon, when responding to questions from auditors on April 5. “New Hampshire was well served by Mr. Theobald’s tenure.”
Ties to EAI
Of all Theobald’s potential conflicts, the one - hitherto unreported — with Evaluation Associates Inc. might be the most serious.
EAI was not just another fund seeking the Retirement System’s money. It was the consultant - and had been for some 30 years — that the volunteer board, with limited expertise and experience, had hired to evaluate investment opportunities.
(Late last year the Retirement System board replaced EAI with another consulting firm. Calls to EAI were not returned by deadline. The Retirement System Board offered no comment on the issue.)
Aside from Theobald, the volunteer board had limited financial training and experience, the audit said, and “for this reason, trustees rely extensively on the recommendations of the board’s outside investment consultant, EAI.”
Indeed Gordon, responding to the audit on behalf of Theobald, noted that fund managers had to go through EAI, not Theobald, in order to make presentations to the board.
“Mr. Theobald did not have the power or the authority to submit manager names to the Board as this was tasked to Evaluation Associates Inc.,” wrote Gordon.
Theobald did “recommend” to EAI several companies with which he had ties — though by recommending, Gordon explained in a footnote, “we suggest only that Mr. Theobald was inviting EAI to review the performance of the suggested manager.”
Gordon’s letter includes a list of more than 40 companies, though it does not specify what Theobald’s relationship was with the companies cited, nor does it state which of the “several” companies were suggested to EAI.
Theobald was making his suggestions to Tony Minopoli, the EAI consultant handling the Retirement System account.
The audit raised questions about Minopoli’s later departure from EAI but concluded his reasons for leaving were “personal and professionally oriented.”
Theobald and his Maiden Lane business partner Jim H. Kelly Jr. were familiar with EAI in another capacity. They regularly approached another EAI consultant on behalf of - and at the expense of - their private clients, according to a sworn deposition included among the 240 exhibits attached to with the audit.
The deposition was taken in January 2004 as part of a civil suit filed in Syracuse, N.Y., by J.W. Burns & Co., a money-management firm that paid Maiden Lane Partners $10,000 a month plus expenses to turn up business at various pension funds throughout the United States.
Burns charged that Maiden Lane took the money, but didn’t do what it said it would do during 2001 and 2002.
Theobald testified that he didn’t just solicit the New Hampshire Retirement System itself “because it would have been a conflict.”
At other times, the line between chairman and being advocate for his clients seems to blur.
For instance, Theobald testified in his deposition that he asked reporters from various trade magazines that covered him and his board to publish articles about Burns.
Dinners and golf
The deposition also mentions a number of dinners and golf dates with various representatives of pension fund consulting firms, including Great Lakes Capital Partners and Pension Fund Evaluations, two brokers on the retirement system list.
Theobald also dined and played golf with Ted Swedock, manager of research services at EAI.
Kelly’s testimony makes it clear that these meals weren’t inexpensive affairs either. One of the restaurant tabs, for a meal with a trustee of a institutional retirement fund, was $750, Kelly said.
Maiden Lane, however, usually treated the consultants, not the trustees themselves.
In February 2002, Kelly billed Burns and Co. for the $213 tab at the Oak Shaker Inn in Latham, N.Y., for dinner with an EAI consultant who was representing the New York State Teacher’s pension fund.
In May 2001, Maiden Lane billed Burns $329 for lunch at Acappella Restaurant in New York with representatives of the Carpenter’s Union pension fund.
Maiden Lane was already marketing the fund on behalf of another client.
“And how did it [the Carpenter’s Union] become a client of yours?” Kelly was asked in his deposition.
“Through Evaluation Associates,” Kelly replied. He later added, “That was all handled with Evaluation Associates.”
EAI would later be key in many of the investment decisions examined by the New Hampshire auditors.
For instance, Theobald and Minopoli met in November 2002 with the new Tradewinds/American Express team, including Theobald’s Boston officemate, Clarke Blizzard. And Minopoli stated, according to the audit, that, “given the reputation and experience of the new members of the Boston-based American Express team,” he felt comfortable recommending to the board that they “be given a chance.”
When Northwinds’ performance lagged in 2003, Minopoli said that EAI “certainly does not recommend action at this time,” though it did recommend replacing the team the following year.
EAI recommended against investing into a fund Blizzard pitched in 2004 (Technology Venture Partners), but allowed Blizzard to make his presentation, Minopoli told the auditors, “because Mr. Theobald wanted the board to consider TVP.”
The board eventually went on to invest in TVP — “a very rare instance where the board diverged from EAI’s recommendation,” according to the audit.
EAI also was in the thick of other matters investigated by the audit.
Some of the e-mails concerning the Hermes investment indicated that Minopoli was a strong advocate, and was interested in it for himself — an allegation that Minopoli denies according to the audit. It was Minopoli, according to the audit, who recommended that Prism evaluate the Hermes investment because Theobald was “comfortable” with Prism, the audit said.
And Prism didn’t charge for its due diligence “as a professional favor to Mr. Minopoli.” It was Minopoli who introduced Prism to the board in 2000.
But Prism cautioned against the Hermes, and Minopoli appeared to agree.
EAI also endorsed the move that Great Lakes be added to the Retirement System’s directed brokerage list (though Minopoli said he opposed Theobald’s proposal - endorsed by the board - to require that managers make half of their trades, as opposed to 35 percent, though the listed brokers.)
However, EAI’s recommendation that Great Lakes be added was lukewarm, since Minopoli noted that few people would choose it because it charged a higher commission.
Noting that Maiden Lane was unsuccessful at even securing a presentation for Burns & Co., Theobald’s attorney Karl emphasized that Theobald did nothing wrong either in his role as a third-party marketer or his role as chairman of the Retirement System board.
“There is nothing in the ethics rules that would have prevented this type of contact,” Karl said. “It was because of his expertise that he was appointed as chairman of the System. If the ethical rules were viewed as prohibiting Ed from discussing the nature of his business and present clients with EAI, then the rules should so have stated. They did not. The simple truth does not a conflict-in- interest make.”

This article appears in the May 12 2006 issue of New Hampshire Business Review